Economic headwinds? Sticky inflation? Consumer spending slowing? Meh. The market is looking at one, and only one thing – the end of Fed tightening. While the economic data remains more robust than the Fed would like, it does appear sentiment is on the side of one more interest rate hike later this month and then an end to the concerted effort by the Federal Reserve to slow the economy. Yes, the Fed did say they could raise rates twice more this year, but I suspect it’ll keep the final rate hike in its back pocket only to be used if absolutely necessary.
You know how when the fuel gauge on your car lights up signaling your gas tank is virtually empty but you can drive for what seems like hundreds of miles more? That’s what the economy feels like to me these days. To be fair, most of the news is good. Inflation in June fell faster than expected and now sits at 3.0% down from 4.0% just the month prior. Core CPI which excludes food and energy remains high at 5.0% but is testimony to the fact that food and energy prices have fallen significantly in the past twelve months. In similar fashion, the Producer Price Index (PPI) also fell in June, indicating that the cost to produce goods has fallen commensurately. This all bodes well and is why the markets took off again this week. While the fuel gauge light is on and we are cruising along with the wind blowing through our hair, just know that we are going to eventually have to pull off and get some gas. That time isn’t now, but it is inevitable.
Summer seems to be the time when I catch up on my favorite shows like Ted Lasso, The Diplomat, The Bear, Succession, or Jack Ryan. Having lived through the dearth of programming due to the pandemic, I am sorry to say we may be headed into another dry spell. This week the Screen Actors Guild (SAG) decided to strike for many of the same reason the Screen Writers Guild did a couple months ago. This is the first time in over sixty years that both unions will be on strike at the same time. Also, a bit of trivia is that Ronald Reagan was president of the Screen Actors Guild during the last strike. Anyway, the issue appears to be protections against artificial intelligence, as well as, an increase in base pay and residuals from streaming services. As for other unions threatening to strike, UPS drivers, the largest contingent in the International Brotherhood of Teamsters (IBT), could cripple supply chains with estimates being as high as $7B every ten days they’re on strike. Roughly 340,000 union-represented UPS workers handle about a quarter of U.S. parcel deliveries. The current contract expires at midnight July 31. The union wants pay increases for part-time workers who account for half the UPS workforce. And not to be forgotten, the United Autoworkers Union (UAW), which represents 150,000 workers, is in talks with the Big Three Detroit automakers as its contract expires September 14. The key sticking points are job security during the transition to electric vehicles, cost-of-living adjustments, and organizing EV Gigafactories. As you can see, the large numbers of workers threatening strikes could have an impact on big swathes of the economy. Let’s hope they are resolved amicably and in a timely fashion.
In company news, we learned this week that Chipotle, never content to rest on its laurels, is at it again. We’ve seen artificial intelligence, automation, and robotics take hold throughout the fast food industry. Now behold the "Autocado", an “avocado processing robotic prototype that cuts, cores, and peels avocadoes before they are hand mashed.” The idea is that a machine could do this faster, with less risk of injury, and with less food waste. The company uses approximately 4.5 million cases of avocadoes annually, equivalent to more than 100 million pounds of the fruit. As for consumers, Amazon recorded its most successful Prime Day ever. The first day alone was the single largest sales day in company history. Over the course of the two-day shopping event, it sold more than 375 million items worldwide for a record $12.7 billion, up 6.1% from last year. The U.S. consumer is alive and well.
In closing, I turn to what I think is the craziest story I came across this week. You’ll remember that earlier this year Silicon Valley Bank (SVB) filed for bankruptcy marking the largest U.S. bank failure since 2008. To a large extent, its failure was of its own making due to poor management and lack of risk mitigation. So, what was the story this week, you ask? The bank is suing the U.S. Federal Deposit Insurance Company (FDIC) to recover over $1.938B that was seized by the regulator when it took over the failed regional lender. The bank said the lack of access to these funds “is impeding its ability to reorganize, and causing harm on a continuous basis.” The FDIC estimates that its moves to backstop uninsured depositors at Silicon Valley Bank (and Signature Bank) cost its deposit insurance fund $15.8B. Now you know.Bruce J. Mason, MBA